The appetite for risk among insurance company asset managers appears to be quite bullish, despite an expectation that risks will grow in 2018. Delegates polled at yesterday’s (October 19) FT Insurance Summit in Hong Kong were generally willing to maintain or even increase risk exposures over the next 12 months.
John Leung, CEO of Hong Kong’s regulator, the Insurance Authority, said in a keynote speech that the appearance of “black swans and grey rhinos on the horizon” meant that resilience may become a buzzword in 2018.
Asked for their views of the current market environment and how this was impacting their asset allocation, regional chief investment officers were broadly comfortable with the markets at current levels. However, all agreed that an unwinding of monetary easing by two or more of the key central banks (i.e. not just the Federal Reserve), or significant property correction in any of the key global markets, Australia for example, would see investor concerns grow.
With a key focus this week being China’s National People's Congress, investors are waiting to hear what measures will be taken to deal with the country’s ballooning debt. Household debt has doubled in the last four years, said Mark Konyn, group CIO at AIA Group. But China concerns were overplayed, said other CIOs, and there is now a resurgence in foreign investor support for the Chinese market.
Paul Carrett, group CIO for Hong Kong-based FWD Insurance said, “The ultra-bearish case for China has been taken off the table. Almost perversely, we see that China is facing up to the structural challenges and the features of so-called creative destruction (in terms of state-owned enterprise and supply side reforms) are actually encouraging for investors.”
But Konyn had a different view. “The concern is around trying to de-financialise the economy while trying to maintain a relatively stable level of growth. Those two things aren’t really consistent," he told the audience.
With regard to central government policy, Marc Franklin, portfolio manager with Conning Asia Pacific said the Chinese government recognises that restructuring is often anti-growth and is concerned to maintain control in order to evolve gradually, but that this was “not control for control’s sake. They are striking the balance between reform and growth”.
Infrastructure in vogue
Depending on the nature of their insurance book, insurers in the region take a variety of approaches to portfolio construction.
Infrastructure is increasingly on the menu for those looking for diversification and a possible yield boost. But the infrastructure opportunity should be looked at very carefully, said the CIO panellists.
Conning’s Franklin said that while Asian governments understand they need to increase the supply of infrastructure investment opportunities, if the supply remained thin, investors would need to assess whether the returns justify the illiquidity when compared to public markets.
Contrary to popular belief, Carrett observed that infrastructure “can be a really risky asset class” and suggested that in the current environment FWD was “more risk aware than normal” when it came to real assets. He said investors should be prepared to say no “when you don’t think you have an edge or an ability to pull these deals apart”.
Emerging market debt is another asset class that has become a vogue in recent years. Konyn noted that AIA had been an early investor in regional government debt.
“We were fairly instrumental in places like Thailand in helping the government build out their infrastructure," he said. "At the beginning we owned something like 25% of the outstanding Thai government debt. In China we were one of the first buyers of the Century bond and last year we took a stake in one of the large Vietnam issues, which was a 30 year bond."
Panellists were asked if investors are now making the call that they can get long-term returns from such assets without taking on additional risks, or if this was just a tactical phase?
Jean-Charles Sambor, deputy head of emerging markets fixed income at BNP Paribas Asset Management offered his view.
“The attitude of the investors in Asia has changed dramatically. Five or 10 years ago, when you were buying five-year paper in local currency debt, it was the very long end of the curve," he said. "Now that you have 20 and 30-year paper in Indonesia, you can be very liquid at the long end, since you have not just banks but insurance companies and pension funds buying.”
Konyn added, “Compared to the Asian financial crisis, it’s night and day in terms of the make-up of the market”, with much greater depth in countries like Indonesia, for example, and a much more diversified investor base. But he said the tactical aspect is still an open question.
“It’s one of the tests we are going to face over the next six to 12 months. With financial tightening in the US the concern is whether any tourist dollars that have found their way into emerging markets may likely reverse course.”